BRAD DAVIDSON Brad Davidson - Coming Soon€¦ ·  · 2015-02-03BRAD DAVIDSON Brad Davidson is...

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1 BRAD DAVIDSON Brad Davidson is President of SPARDATA Business Valuation Experts of Elkridge Maryland and is a recognized expert in the valuations field. Organizations which have invited Davidson to lecture include the Internal Revenue Service, the Securities and Exchange Commission, the North American Securities Administrators Association, the Department of Labor, the Federal Financial Institution Examination Council, the Federal Reserve, the Michigan Bankers Association, the Virginia Bankers Association and the American Society of Pension Actuaries. SPARDATA has been cited on numerous occasions by the Wall Street Journal, the Washington Post and other publications. In 1980 Davidson began his career in the financial services industry when he became a financial advisor with Merrill Lynch, where he was a “rookie of the year” in 1981. In 1984 he joined Prudential-Bache Investments as a vice president, leaving in 1986 to run an investment fund that bought and sold real estate limited partnership interests in the secondary market. In 1990 he became president of SPARDATA, a firm with experience valuing over 27,000 privately- held businesses. The firm’s clients include business owners; the advisors serving them (including financial advisors, trust officers, CPAs and attorneys) and government institutions. Financial service providers that have chosen SPARDATA to provide valuation services to their clients include New York Life, AXA Advisors, National City Bank, MassMutual, PNC Bank, Guardian and Morgan Stanley Trust. Beyond financial analysis, Davidson has had a diverse array of work experiences. From 1977- 1979 in his first job after college, he worked on Capitol Hill as a legislative assistant to a Texas Congressman from a rural district. (To this day he will discuss the Federal Insecticide, Fungicide and Rodenticide Act with anyone willing to listen.) Working on the Hill infected him with the political bug so in 1979 Davidson enlisted in the Maryland Army National Guard and was ordered to Ft. Sill OK for basic training. (Later he attended Officer Candidate School, was commissioned an infantry officer and retired in the late 1980s having achieved the rank of Captain in the United States Army Reserve.) Two years later Davidson became the “boy wonder” of Annapolis politics by becoming the youngest person ever elected to the Annapolis City Council; he was reelected without opposition in 1985. In 1987 Governor William Donald Schaefer appointed him Chairman of the State Commission on the Capital City, a position he held until 1996. Today Davidson serves on the boards of St. John’s College of Annapolis Maryland and Santa Fe New Mexico; the Historic Annapolis Foundation and the J. M. Kaplan fund in New York City. From 1984 until 2002 Mr. Davidson was a Director of Microsemi Corporation of Santa Ana, California, a publicly-held manufacturer of electronic products where he served on the audit and compensation committees. He lives in Annapolis Maryland with Lynne, his wife of 25 years. They have two children. I:\Knowledge Base\Presentations\CV-MACPA.doc

Transcript of BRAD DAVIDSON Brad Davidson - Coming Soon€¦ ·  · 2015-02-03BRAD DAVIDSON Brad Davidson is...

Page 1: BRAD DAVIDSON Brad Davidson - Coming Soon€¦ ·  · 2015-02-03BRAD DAVIDSON Brad Davidson is President of SPARDATA Business Valuation Experts of ... Organizations which have invited

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BRAD DAVIDSON

Brad Davidson is President of SPARDATA Business Valuation Experts of Elkridge Maryland and is a recognized expert in the valuations field. Organizations which have invited Davidson to lecture include the Internal Revenue Service, the Securities and Exchange Commission, the North American Securities Administrators Association, the Department of Labor, the Federal Financial Institution Examination Council, the Federal Reserve, the Michigan Bankers Association, the Virginia Bankers Association and the American Society

of Pension Actuaries. SPARDATA has been cited on numerous occasions by the Wall Street Journal, the Washington Post and other publications. In 1980 Davidson began his career in the financial services industry when he became a financial advisor with Merrill Lynch, where he was a “rookie of the year” in 1981. In 1984 he joined Prudential-Bache Investments as a vice president, leaving in 1986 to run an investment fund that bought and sold real estate limited partnership interests in the secondary market. In 1990 he became president of SPARDATA, a firm with experience valuing over 27,000 privately-held businesses. The firm’s clients include business owners; the advisors serving them (including financial advisors, trust officers, CPAs and attorneys) and government institutions. Financial service providers that have chosen SPARDATA to provide valuation services to their clients include New York Life, AXA Advisors, National City Bank, MassMutual, PNC Bank, Guardian and Morgan Stanley Trust. Beyond financial analysis, Davidson has had a diverse array of work experiences. From 1977-1979 in his first job after college, he worked on Capitol Hill as a legislative assistant to a Texas Congressman from a rural district. (To this day he will discuss the Federal Insecticide, Fungicide and Rodenticide Act with anyone willing to listen.) Working on the Hill infected him with the political bug so in 1979 Davidson enlisted in the Maryland Army National Guard and was ordered to Ft. Sill OK for basic training. (Later he attended Officer Candidate School, was commissioned an infantry officer and retired in the late 1980s having achieved the rank of Captain in the United States Army Reserve.) Two years later Davidson became the “boy wonder” of Annapolis politics by becoming the youngest person ever elected to the Annapolis City Council; he was reelected without opposition in 1985. In 1987 Governor William Donald Schaefer appointed him Chairman of the State Commission on the Capital City, a position he held until 1996. Today Davidson serves on the boards of St. John’s College of Annapolis Maryland and Santa Fe New Mexico; the Historic Annapolis Foundation and the J. M. Kaplan fund in New York City. From 1984 until 2002 Mr. Davidson was a Director of Microsemi Corporation of Santa Ana, California, a publicly-held manufacturer of electronic products where he served on the audit and compensation committees. He lives in Annapolis Maryland with Lynne, his wife of 25 years. They have two children.

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The SSVS‐1What It Means &How To Comply

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• Founded 1990• 27,000 entities valued since 1990• Valuations only, no audit services• Clients include IRS, SEC, DOL• CPAs refer when they: 

don’t do valuationsdo valuations but have a conflict etc.

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1. What Is The Value?

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Estate of Thompson v. Commissioner

• Valuation date: May 2, 1998

• Thompson Publishing Company: 95 year old publisher of product information catalogs, buying guides, industry newsletters.  

• Successful, profitable company – had an effective monopoly on B2B industrial and manufacturing print publications.

• Internet: risks, competition, new opportunity?

• 6th most trafficked B2B websites in early 1998. 

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Estate of Thompson v. Commissioner1993‐1998 Financial Results (note: dod 5/2/98)

98,675,89328,370,056256,806,4931998

97,255,14015,927,549240,116,9751997

72,901,31713,171,695216,924,1561996

71,211,66511,107,716200,487,1531995

57,691,11412,804,431179,287,0181994

$48,317,000$14,333,288$168,059,0001993

Total Liquid Investments

Total Net Income

Net Sales Revenue

Fiscal Year

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Estate of Thompson v. Commissioner1993‐1998 Internet Growth

Fiscal Year

Print Subscribers

CD-ROM Subscribers

Internet Subscribers

1993 73,500 1,000 N/A 1994 78,000 2,500 N/A 1995 81,000 5,000 40,000 1996 80,000 13,000 225,000 1997 67,500 25,000 550,000 1998 45,500 45,500 *

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What Was Thompson Publishing Worth In 1998?

How many say:A. $25,000,000?B. $100,000,000?C.   $200,000,000?

$98,675,893$28,370,056$256,806,4931998

Total Liquid Investments

Total Net Income

Net Sales Revenue

Fiscal Year

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Estate of Thompson v. CommissionerTax Court’s Description of Estate’s Valuator #1

“… Hired George E. Goerig, an Alaskan lawyer to appraise and prepare a valuation report …”

“… Goerig believed and apparently representedthat he would be able to obtain for the estate a more favorable valuation of the estate’s TPC stock.”

“… estate learned of Goerig from an attorney for decedent’s family who had met Goerig on a fishing trip.”

“... he appears to have attended limited appraisal courses, other than a few courses while working for (IRS) many years ago.”

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Estate of Thompson v. CommissionerTax Court’s Description of Estate’s Valuator #2

“… (CPA) Wichorek provides accounting and tax preparation services...and undertakes occasional valuations for small businesses.”

“... He belongs to no professional organizationsor associations relating to his appraisal or valuation work.”

“... Goerig and Wichorek were barely qualified to value a highly successful and well‐established New York City‐based company with annual income in the millions of dollars.”

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Estate of Thompson v. CommissionerThe Tax Court’s Opinion Of Value

A.  $25,784,000 (Estate)

B.  $225,000,000 (IRS)

C:  $110,508,000 (Tax Court)

$98,675,893$28,370,056$256,806,4931998

Total Liquid Investments

Total Net Income

Net Sales Revenue

Fiscal Year

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1. What Is The Value?2. Overview of SSVS‐1

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Foreword

“... to improve the consistency and quality of practiceamong AICPA members performing business valuations.”

“... AICPA members will be required to follow this standard when they perform engagements to estimate value...”.

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Scope, Exceptions• Applies to engagement to estimate 

value (conclusion of value or calculated value) where analyst applies professional judgment.

• Does not apply when:– part of attest engagement (i.e. as 

part of audit, compilation review)

– value provided by client– internal use assignments by 

employee members not in public accounting.

– determining economic damages– mechanical computations– when use is not practical or 

reasonable.

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Professional Competence

“... A valuation analyst should possess a level of knowledge of valuation principles and theory and a level of skill in the application of such principles...”

“... An in‐depth discussion of valuation theory and principles, and how and when to apply them, is not within the scope of this Statement.”

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American Society of AppraisersASA (Accredited Senior Appraiser)

Institute of Business AppraisersCBA (Certified Business Appraiser)

Nat’l Association of Certified Valuation AnalystsCVA (Certified Valuation Analyst)

American Institute of CPAsCPA/ABV (CPA Accredited in Business Valuation)

101: Credentialing Organizations

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Objectivity, Conflicts

• “Objectivity is a state of mind”.

• If attest services client:– “...would a reasonable 

person aware of all the relevant facts conclude that there is an unacceptable threat to the memberʹs and the firm’s independence....”

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101: Getting Ready

• Analyze financial statements– Liquidity (current ratio, quick ratio etc.)– Utilization of assets (turnover etc.)– Profitability (margins etc.)– Leverage

• Normalize financial statements– non‐recurring items– related party transactions– salary adjustments– etc.

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Analyze the Interest

• Applicable standard of value• Applicable premise of value

• Assumptions & limiting conditions

• Governmental rules, other professional  standards

• Non‐financial information• Ownership information• Financial information

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• Fair Market Value: (Rev. Rul. 59‐60)• Fair Value.  

– Varies by state – very inconsistent.  Used in dissenting stockholder litigation, etc.

• Investment Value.  – Value to a particular investor.

• Intrinsic Value.  – “True value”.

101: Standards of Value

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Business status under which transaction assumed to take place:Going concern – value in continued use Assemblage of assets – value in place, but not in current use or as a going concernOrderly disposition – value in exchange on piecemeal basis given a normal time to sellForced liquidation – value in exchange on piecemeal basis given less than normal time to sell

101: Premises of Value

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Income Approach – valuing the business based on some form of economic income stream.

Discounted future benefits methodCapitalization of benefits method

Market Approach – valuation by reference to other transactions.

Guideline public company methodGuideline company transaction method

Asset‐Based Approach – valuation on the basis of assets and liabilities

Adjusted net asset value methodExcess earnings method

Approaches & Methods

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• Examines benefits flowing from the asset; converts them into a present value.

• Commonly used for:– Service businesses

– Professional practices

– Etc.

Income Approach

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Capitalized Income MethodUsed to analyze income streams

expected to grow at constant rate (or stay constant) over time.

1. Start with 5+ years of after‐tax adjusted earnings.  Assumption:

a. Amount of income capitalized will remain constant each year in perpetuity; or 

b. Amount of income being capitalized will either increase or decrease at some constant rate forever.

2. Determine capitalization ratea) Cap Rate = Discount Rate (aka 

“fair return”) – Growth Rate

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Used to analyze income streams expected to fluctuate over time.

1. Projections DO NOT INCLUDE a constant growth rate of the income stream.  Growth (if any) built into projections.

2. Discount rate = cost of capital = risk‐free rate + risk premiums. 

Discounted Future Benefits Method

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Estate of Thompson v. CommissionerDiscounted Future Benefits Method (IRS’ expert)

$158,827,000PV of Future Cash Flows

152,567,000Plus Liquidation* Value

$6,260,000Subtotal

1,108,0002002

1,178,0002001

1,261,0002000

1,333,0001999

$1,390,0001998

PV of Estimated Cashflows

Fiscal Year

*Liquidation, not terminal

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Asset‐Based ApproachAssumes the value of a business 

is based on underlying value of its assets.  

1. Per 59‐60, suitable for:Real estate holding companiesInvestment companiesFinance companiesMfg companies heavily invested in fixed assetsDistressed; assets worth more than benefit stream

2. Assets and liabilities adjusted from book value to fair market value.

3. Problem: most business assets are a means to generate future income. 

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Adjusted Net Asset Method

1. Obtain or develop an accrual basis balance sheet

2. Determine which assets and liabilities on the balance sheet require valuation

3. Identify any off‐balance sheet assets or liabilities

4. Value the items identified in steps 2 and 3

5. Construct a market value‐based balance sheet using the adjusted values

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Cost Method

Used to value intangible assets:– type of cost (i.e. 

reproduction or replacement)

– appropriate depreciation, obsolescence and remaining useful life.

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Guideline Public Company Method – share prices of similar, actively‐traded publicly owned companies are applied to the subject company through valuation multiples.

Stock Price/Net IncomeStock Price/Cash FlowStock Price/RevenueEtc.

Guideline Public Company Method

Data Sources:•SEC filings•Public information database

•Other?

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Transaction prices of similar, public or privately‐owned companies are applied to the subject company through valuation multiples.

Data Sources:Sales of Public Companies

Mergerstat®/BVR Control Premium Study™Public Stats™

Sales of Private CompaniesPratt’s Stats™BIZCOMPS©

Guideline Transactions Method

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Valuation Adjustments

• Step 1: estimate entity value (affects all shareholder)

• Step 2: analyze factors affecting subject interest (some shareholders, not all)– Minority versus control 

(“LOC”)– Lack of marketability 

(“LOM”)– Blockage discount– Key person discount– Restrictive Agreement 

discount– Investment company 

discount– Lack of voting rights discount

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101:  Valuation Discounts and Premiums

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Conclusion of Value• Correlate and reconcile results

obtained from different approaches and methods

• Assess the reliability of the different results 

• Determine whether conclusion of value should reflect one or multiple approaches and methods. 

• Weighting of valuation method results

• Final value estimate• Review of appraisal process

– Did the analyst appraise the right thing?

– Did the analyst appraise the right thing in the right way?

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Other Items

• § 43 Subsequent events• § 44‐45 Documentation

• § 46 Calculation engagement• § 47‐50 Valuation report

• § 51‐70 Detailed report• § 71‐78 Other report types

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1. What Is The Value?

2. Overview of SSVS‐1

3. Using Valuations Proactively

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• Owners think¹ business is worth $X;    actually it is worth $2X, $½X etc.

• Owners don’t know they don’t know.

• Advisors tend not to raise the issue.

Owners misjudge what their businesses are worth

¹2005 SPARDATA study of owners

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Dry Cleaner #1 Dry Cleaner #2

Sales: $1,000,000

Value: $1,500,000Sales: $1,000,000

Value: $750,000

Why “rules‐of‐thumb” are wrong:they assume all companies are alike.

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1. Botched succession (caused by value disconnect)

2. Botched sale (caused by value disconnect)

3. Fight with partner’s spouse (caused by underfunded buy‐sell agreement)

4. Miserable retirement (caused by value disconnect)

5. Fire sale of business (to pay estate taxes)

So What?

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Ask “the valuation question”

•Q:  When was the last time you had your business professionally valued?

•A:  Never.

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The SSVS‐1What It Means &How To Comply